Financial crisis, regulation and competition: the Romanian banking experience

  2012-10-27 1.Abstract
By the early 1970s, competition in the banking system was limited. Reduced competition in the banking system was due to regulations adopted by many countries after the financial crisis of the 1930s. At that time, authorities believed that the high risks which banks have assumed, in a fierce competition context, led to destabilization of the financial system. After the 1980s, deregulation, financial liberalization and technological change were important factors that have led to increased competition in the banking sector. Therefore, an important issue for regulators and supervisors is the relationship between competition in the banking system and financial stability. The specialty literature, both theoretical and empirical, has not reached a consensus on the effects of competition on financial stability. This problem became more acute under the global financial crisis. Against this background, the paper analyses the role of competition in the Romanian banking system in the context of the global crisis. The paper is structured as follows: the first section reviews the arguments supporting that increased competition in banking system leads to improved financial stability; the counterarguments are mentioned later. The role of regulations in managing the competition in banking system is also emphasised. The last section analyzes developments on competition and stability in the Romanian banking system.
 
2.Introduction
 Over time an important issue for regulators and supervisors was the relationship between competition in the banking system and financial stability. The specialty literature has not reached a consensus on the effects of competition on financial stability. The Great Depression of the 1929-1933s led to adoption of regulations aimed to decrease competition in banking system. Gradually, competition in banking system was allowed. The old regulations were removed and other instruments to manage excessive risk taking were introduced. After 1990 the Romanian banking system was restructured and legislation was aligned with the European Union (UE) requirements. In the early stages the level of concentration in the banking system was quite high, but at present it is lower. Foreign banks that have invested in Romania contributed to increased efficiency and competition. But the global financial crisis revealed that foreign banks could be an indirect channel of crisis propagation.
 
https://www.sciencedirect.com/science/article/pii/S221256711200175X